May 2001
Vol. 10, Issue 2
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Welcome to the most recent edition of the Buckingham, Doolittle & Burroughs, LLP, Advisor. These articles are written by attorneys at Buckingham and address current topics of importance to businesses, employers and individuals. This issue includes two articles focusing on tax: Steven Dimengo outlines recent legislation concerning the "contact period" that determines Ohio residency for purposes of determining investment income taxation, and Robert Malone describes several ways in which tax liabilities can arise from a merger or acquisition transaction. Thomas Brule discusses how to gain access to the capital, staff and local market knowledge needed to expand a business through franchising methods. An article by Elizabeth Cargle warns that employers can unintentionally find themselves extending uninsured/underinsured motorist coverage to their employees' families. Bill Williams explains the importance of scrutinizing your natural gas bill to ensure that you are not being charged at today's rate for usage that occurred in the past. Finally, Philip Wiese and Louis Wagner discuss some possible unintended consequences related to the widespread use of the Internet as a business tool. As always, we hope that you find the Advisor both
valuable and interesting. If you would like more information on
any of these topics, please feel free to call the author of the
article. Jeannette L. Knudsen, Esq. is a member of the Intellectual Property Practice Group and can be reached at jknudsen@bdblaw.com or or at 330.643.0350. |
Tax
Traps For The Unwary Buyer
By Robert W. Malone Esq.
While there are many aspects of due diligence in any acquisition transaction, none is more important than those relating to successor tax liabilities. Most businessmen know about the risks associated with the purchase of stock or a merger, yet many are unaware of the successor liabilities that can result from an asset acquisition.
Structure of the Acquisition
Acquisition of a corporation can take one of three basic forms: a purchase
of its stock, a purchase of its assets, or a merger, with either the
acquiring or the acquired corporation being the surviving entity.
In the case of a stock purchase, the purchasing corporation does
not assume liability for the acquired corporation's taxes, but the acquired
corporation, which is now owned by the purchaser, will continue to be
subject to all pre-existing tax liabilities. To the extent that these
liabilities are unknown as of the time of the acquisition, the purchaser
may overpay for the seller's stock.
In a merger, the buyer assumes an even greater risk because
the selling corporation's assets become exposed to the claims of the
creditors of the acquired corporation, including governmental creditors
who are owed delinquent tax liabilities.
In an asset acquisition, the general rule is that the buyer acquires
the seller's assets free from liabilities, at least so long as the parties
comply with the bulk sales statute in the few states where that statute
still remains on the books. There are, however, certain liabilities,
and particularly those for taxes, that the buyer may become responsible
to pay.
Sales and Use Taxes
As a general proposition, governments are particularly sensitive regarding
the collection of so-called trust fund taxes where a business collects
taxes from a third party and then remits them to the state. In the government's
view, these taxes are not an asset of the business but are being held
in trust for the government. The statutes of many governmental entities
impose personal liability upon the managers, and successor liability
upon the buyers, of businesses required to collect trust-fund taxes.
Examples are the sales tax collected from in-state purchasers and the
use tax collected from out-of-state purchasers of a business' products.
In Ohio and many other states, the buyer of a business that has a sales
or use tax deficiency must escrow a sufficient portion of the purchase
price to pay the deficiency until a release can be obtained from the
state indicating that it has been paid in full. Usually, it is not possible
to obtain the release prior to the acquisition. It is necessary, therefore,
for the seller to escrow or hold back a significant portion of the purchase
price based upon its best estimate of the seller's potential tax liability.
Payroll Taxes
Another type of trust taxes are payroll taxes. These taxes are imposed
at the federal, state, and local level and include income tax withholding,
social security and Medicare taxes, workers' compensation insurance
premiums, and unemployment compensation act taxes. The statutes of Ohio
and many other states impose successor liability for these taxes upon
a buyer of assets unless it obtains a release similar to the one described
above. The buyer's prudent course of action in this situation is to
escrow or withhold a sufficient portion of the purchase price to protect
itself against the potential liability until the release can be obtained.
While the federal government does not impose successor liability for
payroll taxes upon the purchasers of businesses, a purchaser may nonetheless
incur liability if it in some way becomes involved with the business
as a lender or manager prior to the acquisition. This is most likely
to occur when the business being sold is in financial difficulty and
the seller requests the buyer's assistance prior to the acquisition
in order to preserve the business' value. A buyer receiving such a request
should decline involvement or proceed only with the utmost caution.
Property Taxes
Property taxes are generally a lien upon the property to which they
relate until the tax is paid. This is true of real property across the
country and, in many states, of personal property as well. Buyer's counsel
should examine the lien records and proof of payment in order to determine
whether the property his client is acquiring will be subject to a property
tax lien. Even if there is no lien, the purchaser must also be aware
that the purchase may increase the value of the property upon which
the taxes are imposed. If taxes are paid in arrears, as is the case
in Ohio, the buyer must make certain that it has protected itself against
the seller's non-payment of an unexpected increased tax burden.
Overly-Aggressive Tax Positions
Even if a buyer of assets escapes liability for any of the seller's
taxes, the buyer needs to be aware of tax positions adopted by the seller
that cannot be defended on audit. Continuing to follow the seller's
tax practice may result in a future liability plus interest and penalties.
Correcting the seller's tax practice will affect the after-tax cash
flow to be derived from the business as the buyer's tax liability will
be greater than that of the seller.
All potential buyers of businesses must perform due diligence concerning
the tax attributes, compliance history, audit record, and payment history
of the businesses they hope to acquire. Even a purchaser of assets needs
to be concerned with these matters as it may unwittingly inherit the
tax liability of the seller or a practice that will create tax liabilities
for the future.
Robert W. Malone Esq. is a member of the Business Law Practice Group and Chairman of the Mergers and Acquisitions Practice Group in Akron, Ohio. For more information please contact Rob at rmalone@bdblaw.com or at 330.258.6545.
Law
Of Unintended Consequences - Internet Jurisdiction
By Philip R. Wiese, Esq., and
Louis F. Wagner, Esq.
Many people do not realize that businesses using Internet web sites to sell goods and services out of their home state may, if sued, be forced to defend their case in another state. With the exponential increase in Internet use as a business tool, the perhaps unintended consequence of having to defend a lawsuit "out-of-state" is a real possibility. "Traditional notions of fair play and substantial justice" still govern whether a court has personal jurisdiction over a non-resident defendant. However, the line as to whether a defendant has "purposely availed" himself to the courts of another state has become less clear in situations when a business engages in commerce through the Internet.
So what's the general rule? Courts are split in their decisions. Generally,
however, the more interactive the web site, the greater the probability
that jurisdiction exists. Courts describe a "spectrum of use,"
placing Internet commerce and jurisdiction on a continuum:
This evolving area of the law is bound to test the constitutional limits of due process.
Philip R. Wiese, Esq. is a member of the Litigation and Intellectual Property Practice Groups. Contact Phil at pwiese@bdblaw.com or 330.258.6529. Louis F. Wagner, Esq. is a member of the Intellectual Property Practice Group. Contact Lou at lwagner@bdblaw .com or 330.258.6453.
Natural
Gas Bills
By William G. Williams, Esq.
Are your natural gas bills high? You may have a legitimate complaint
regarding the total dollar amount owed on your monthly bills.
Every residential, business, and industrial user should closely scrutinize their natural gas bills.
However, if you are like most people, you believe that your public utility companies can do no wrong and just pay the amount that is shown on your monthly bill. You may want to more closely review your bills. If your monthly bill shows that it was estimated, and especially if you received estimates for consecutive months and then finally an actual meter reading, it may be worth your while to contact your gas provider. You may have a credit adjustment due you. If your meter is not read for one or more months and your monthly estimated bills show less usage than was actually used and later your meter is actually read, the month that your meter is read reflects the billing rate for that particular month, although the gas was actually used in prior months when the rate was lower. You are paying for the gas at today's rate even though you consumed the gas at an earlier time when the billing rate and the gas purchased by your gas provider was lower. If that is the case, you deserve an adjustment on your bill.
Additionally, you may want to investigate alternative energy suppliers.
You may get a lower gas rate than the primary gas supplier for your
area. The Public Utilities Commission of Ohio (PUCO) has a listing
of alternative residential gas suppliers. You can also call your public
utility primary gas provider if you are a commercial or industrial
user and ask for the names of companies which are in their gas-pooled
account where you can obtain a lower fixed rate for gas over a selected
period of time.
William G. Williams, Esq. is a member of the Business Law, Environmental and Real Estate & Construction Law Practice Groups. Contact Bill at bwilliams@bdblaw.com or 330.491.5237.
Ohio
Income Tax: Residency Rules Softened By Recent Legislation
By Steven A. Dimengo, Esq.
For Ohio personal income tax purposes, individuals in Ohio for 120 or
less days in a calendar year, as measured by an overnight stay (i.e.,
a "contact period"), and maintaining a home outside Ohio for
the entire year, are deemed to have non-Ohio resident status. Generally,
this means their investment income is not subject to Ohio income tax.
Recently enacted legislation, effective for 2001, provides that Ohio will not count toward the residency threshold up to 30 days spent in Ohio for any of the following purposes:
- to provide services for no consideration;
- to raise funds for an IRC §501(c)(3) organization;
- to attend to a medical hardship involving the taxpayer or member of the taxpayer's immediate or extended family; or
- to attend a funeral involving a member of the taxpayer's immediate or extended family.
If a portion of either day before or after the overnight stay is spent for one of these purposes, there will be no contact period. A medical hardship is defined as circumstances under which the individual, or a member of the individual's immediate or extended family, is admitted as a patient into an Ohio hospital, examined in Ohio by a medical professional, admitted into an Ohio nursing home, receiving nursing care in Ohio while staying in an Ohio dwelling, or otherwise receiving ongoing necessary medical care in Ohio. Also included is receiving treatment or care for acute or chronic illness or obstetric treatment or care.
Individuals approaching the 120-day threshold should consider aggregating their nonpermissible activities with the permissible presence enumerated above. For example, an individual in Ohio to attend a funeral or medical hardship might combine such activity with nonpermissible activities to avoid incurring a contact period.
Steven A. Dimengo, Esq. is the chair of the Taxation & Employee Benefits Practice Group. Contact Steve at sdimengo@bdblaw.com or 330.258.6460.
Off
The Clock
By A. Elizabeth Cargle, Esq.
John, an employee of The Company, had a 17-year old son who was involved in a fatal automobile accident. John has not been fully compensated for his losses and seeks underinsured coverage under The Company's insurance policy. According to the Ohio Supreme Court's decision in Scott-Pontzer v. Liberty Mutual Fire Insurance Co. (1999), 85 Ohio St.3d 660, John may have the right to recover from The Company's uninsured/underinsured motorist (UIM) policy.
While this example is for purposes of illustration only, the reality in Ohio is that an employee (or an employee's family member) may be covered under an employer's UIM coverage. Additionally, the employee does not have to be working at the time of the accident to be entitled to UIM coverage.
Employers must understand the implications of the language in their insurance policy. Of primary concern is the definition of "insured" in the policy. If the employer does not intend UIM coverage to extend to employees and their families, the policy must contain a clear and unambiguous definition of "insured."
Employers must also determine if their current UIM coverage will extend to employees acting outside the scope of their employment. It is important to realize that, under Scott-Pontzer, UIM coverage will extend to an employee unless the employer's policy explicitly states that the employee must be acting within the scope of his employment at the time of the accident.
An employer has numerous options to protect itself, including rejecting
all UIM coverage completely or working with its insurer to revise
the language in its insurance policy to limit the implications of
Scott-Pontzer.
A. Elizabeth Cargle, Esq. is a member of the Intellectual Property Practice Group. For more information contact Elizabeth at ecargle@bdblaw.com or 330.258.6465.
National
Development Corporations
By Thomas R. Brule, Esq.
Is your company winning the race to expand? If not, what are the roadblocks?
- Capital?
- Staffing?
- Insufficient knowledge of other markets?
Perhaps a national development corporation would be the vehicle you need to leverage the value of your business. A national development corporation can be an effective means to grow your brand. By working with others, you gain the advantages of their knowledge of the local marketplaces, of access to capital and of assistance with staffing and building the business.
The axiom: first in the marketplace, first in the minds of consumers, applies today (consider the relationship between Coke® and Pepsi®, between Hertz® and Avis®). When you have a great idea, product or service, you have the ability to develop a leading national brand. Through your franchisees, you can be first in the marketplace. Being second, on the other hand, could commit your business to a lifetime of playing catch-up.
If your company is poised for growth, franchising may be your answer.
A franchise helps you form relationships with third parties to develop
new markets. Working through others can expedite the complex process
of taking your product or service to market. National development
corporations may be the fuel that will drive your company to the next
level of profitability and success.
Thomas R.
Brule, Esq. is a member of the Business Law Practice Group.
For more information on Franchising contact Tom at tbrule@bdblaw.com
or 216.615.7315.
Health Law Practice Group
Pat Reymann (Akron,
Ohio) will speak on Medical Staff Credentialing at a seminar presented
by Professional Education Systems Incorporated in Waltham, Massachusetts
on May 22, 2001. To register visit the PESI website at pesi.com
Mark Frasure (Canton,
Ohio) was part of a panel discussion on managed health care sponsored
by the Akron Bar Association and the Summit County Medical Society.
Mark Frasure will speak in July to the incoming class of resident
physicians at Akron General Medical Center. His topic will be medical/legal
matters and the importance of good charting in hospital records.
David Woodburn, Eric Simon, Don Antrim and Thomas Hess spoke at the annual Ohio Health Care Association convention in Columbus, Ohio. Dan and Tom discussed legal issues affecting the long-term care industry. Eric discussed health care vendor contracts and David spoke on estate planning.
Exploring Hospital/Physician Relationships in Ohio was the topic of a Lorman Seminar recently presented by Ted Ward, Pat Reymann and Jeff Royer.
Eric Simon (Akron, Ohio) recently spoke at a Lorman Seminar on HIPPA law implications for physicians and hospitals.
Trusts & Estates Practice Group
David Woodburn (Akron,
Ohio) presented Estate Planning Distribution Techniques at
a seminar for the Cleveland Catholic Diocese Foundation .
Finance & Public Law Practice Group
Candace Campbell Jackson
(Cleveland, Ohio) facilitated a seminar on lobbying laws affecting
nonprofit organizations at the Ohio Association of Nonprofit Organizations
Annual Conference.
Candace also presented to the Cleveland Bar Association Women's section on the subject of Marketing Resources Available for Women Attorneys.
Tax Law Practice Group
Steve Dimengo (Akron,
Ohio) will speak at Lorman Educational Seminars on Sales and Use
Tax in Ohio on June 8, 2001 in Independence, Ohio and on June
15 in Akron. He will also speak on Ohio Sales & Use Tax For
Managers in Cleveland on August 3. To register online visit the
Lorman website at www.lorman.com
Real Estate & Construction Law Practice Group
Andrew Owen (Columbus,
Ohio) will speak in Cleveland on June 12 and in Columbus on June 19
at Depositions: Strategies, Tactics and Mechanics. To register
online visit the PESI website at pesi.com
Don Leach (Columbus, Ohio) will speak on June 6, 2001 at the Builders Exchange of Central Ohio on Ohio's Mechanics' Lien Law. To register online visit their website at bx.org
Don was recently part of a panel discussion on legal and insurance issues of design build construction at the quarterly meeting of the Design Build Institute of America, Ohio Valley chapter.
Employment Law Practice Group
Tod Morrow (Canton,
Ohio) spoke on May 15, 2001 at a seminar on OSHA's New Requirements
sponsored by Summit, Stark and Tuscarawas Safety Councils. His topic
was OSHA's Revised Bloodborne Pathogens Standard.
He recently spoke on OSHA's new ergonomics safety regulation at a seminar sponsored by the Occupational Medicine Center of Tuscarawas County in New Philadelphia. Tod also presented OSHA: Legal and Legislative Developments at the Northern Ohio Universities College of Medicine (NEOUCOM) annual Occupational Safety and Health Conference.
Vince Tersigni (Akron, Ohio) will speak at a series of seminars sponsored by Flex-Team Temporary Service. His topic will be Avoid Costly Law Suits By Investigating Employee Complaints. Seminars will be held in Strasburg, Ohio on June 13, Akron, Ohio on June 26, Ashland, Ohio on July 10, and in Alliance, Ohio on July 18. For reservations or more information call 1.800.860.2252.
Litigation Practice Group
Joel Mirman (Columbus,
Ohio) will speak on Deposition Testimony Preparation on July
19, 2001 in Columbus at a seminar sponsored by Professional Education
Systems, Inc. To register online visit the PESI website at pesi.org
If you are interested in having a speaker from BDB make a presentation
to your organization, please contact: Cheryl Warren, Director of Client
Relations and Marketing 800.686.2825 ext. 546 or cwarren@bdblaw.com
At BDB we are always improving our processes so that we operate
efficiently and effectively. Please let us know how you like our new
broadcast format. E-mail: bdb@bdblaw.com
Phone: 330.258.6473 Fax: 330.252.5473.
Thank you.
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